The move to extend, from April 2019, taxation of non-UK residents on their UK property gains to apply to all disposals (whether direct or indirect) of UK property (whether residential or commercial) raises a number of difficult questions. The government has now set out its proposed answers to some of these in its summary of responses to the November consultation document and draft Finance Bill provisions published on 6 July.
The core features of the new rules remain unchanged from November, including that the tax should be calculated on the same principles as apply to disposals by UK residents, that it should capture only gains accruing from April 2019 onwards, and that, as well as direct disposals of UK property, disposals of interests in UK property-rich entities (in which the non-resident has a 25% interest) should be chargeable.
Much of the complexity surrounds the rules for the disposal of interests in property-rich entities. Some points have been clarified and refined: for example, the charge will be computed by reference to the gain on the interests in the entity itself, even where this reflects to a degree the value of other non-UK property assets held by the relevant entity (only 75% of the entity’s assets need to be or derive their value from UK property for the rules to apply).
There have been concessions. Property-rich entities that use their properties for the purposes of a trade (retailers, utilities and some hotel groups) are exempted. Advisers will be pleased to see the proposal that they should be obliged to report indirect disposals of UK property has been dropped.
On other points, the government has pushed back: there will be no SDLT seeding relief to assist non-residents in collapsing costly offshore investment structures and onshoring their holding vehicles.
Among the trickiest areas, where the government agrees there is still work to be done, are the treatment of exempt investors and collective investment vehicles (CIVs). For CIVs, the government proposes that: (a) tax transparent property funds should be able to elect whether to be treated as opaque or transparent for the purposes of the rules; and (b) widely held property funds that report the identities of their investors and details of their investors’ disposals should be exempt, with investors liable on disposals of their interests in the fund (irrespective of whether they meet the 25% ownership condition).
A ‘pass-down’ exemption or credit system is being considered for investors that would benefit from exemption if they disposed of UK property directly but hold UK property through non-UK resident entities to allow flexibility over how they realise their investments. There is nothing expressly on how the rules will deal with the related scenario where a disposal by a UK resident entity at a lower level in an investment structure would be exempt – for example, because the ultimate owner is a non-UK resident institutional investor, so the qualifying institutional investor subsidiary exemption within the substantial shareholding exemption introduced by F(No. 2)A 2017 applies – but a disposal by the non-UK resident institutional investor of a property-rich entity higher up the structure would now be taxable because that investor is not itself exempt. The government has said that it will consider amending existing exemptions (for example, for overseas pension funds) where appropriate, which may deal with the point in some cases. But the ‘targeted exemptions’ for these investors promised in the November Budget red book do not seem, so far, to have materialised.
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UK property gains for non-residents
The move to extend, from April 2019, taxation of non-UK residents on their UK property gains to apply to all disposals (whether direct or indirect) of UK property (whether residential or commercial) raises a number of difficult questions. The government has now set out its proposed answers to some of these in its summary of responses to the November consultation document and draft Finance Bill provisions published on 6 July.
The core features of the new rules remain unchanged from November, including that the tax should be calculated on the same principles as apply to disposals by UK residents, that it should capture only gains accruing from April 2019 onwards, and that, as well as direct disposals of UK property, disposals of interests in UK property-rich entities (in which the non-resident has a 25% interest) should be chargeable.
Much of the complexity surrounds the rules for the disposal of interests in property-rich entities. Some points have been clarified and refined: for example, the charge will be computed by reference to the gain on the interests in the entity itself, even where this reflects to a degree the value of other non-UK property assets held by the relevant entity (only 75% of the entity’s assets need to be or derive their value from UK property for the rules to apply).
There have been concessions. Property-rich entities that use their properties for the purposes of a trade (retailers, utilities and some hotel groups) are exempted. Advisers will be pleased to see the proposal that they should be obliged to report indirect disposals of UK property has been dropped.
On other points, the government has pushed back: there will be no SDLT seeding relief to assist non-residents in collapsing costly offshore investment structures and onshoring their holding vehicles.
Among the trickiest areas, where the government agrees there is still work to be done, are the treatment of exempt investors and collective investment vehicles (CIVs). For CIVs, the government proposes that: (a) tax transparent property funds should be able to elect whether to be treated as opaque or transparent for the purposes of the rules; and (b) widely held property funds that report the identities of their investors and details of their investors’ disposals should be exempt, with investors liable on disposals of their interests in the fund (irrespective of whether they meet the 25% ownership condition).
A ‘pass-down’ exemption or credit system is being considered for investors that would benefit from exemption if they disposed of UK property directly but hold UK property through non-UK resident entities to allow flexibility over how they realise their investments. There is nothing expressly on how the rules will deal with the related scenario where a disposal by a UK resident entity at a lower level in an investment structure would be exempt – for example, because the ultimate owner is a non-UK resident institutional investor, so the qualifying institutional investor subsidiary exemption within the substantial shareholding exemption introduced by F(No. 2)A 2017 applies – but a disposal by the non-UK resident institutional investor of a property-rich entity higher up the structure would now be taxable because that investor is not itself exempt. The government has said that it will consider amending existing exemptions (for example, for overseas pension funds) where appropriate, which may deal with the point in some cases. But the ‘targeted exemptions’ for these investors promised in the November Budget red book do not seem, so far, to have materialised.
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